way of remembering who was in their corner.
It’s also important to remember that, in a normal year, bank leaders would have to spend marketing dollars to attract these same individuals and businesses to their institutions. Te fact that new customers are already customers (not prospects) represents an opportunity in and of itself.
However, if banks don’t act now to cultivate loyal relationships, they risk losing their new customers when the economy turns.
Many bank leaders are reluctant to embrace swaps. Some think they are too complex, others don’t want to deal with the associated regulatory burdens and still others are concerned about exposure to credit risk or risks unseen.
At the same time, more bankers are using them and finding them beneficial.
Swaps offer pricing flexibility and can free up capacity for fixed-rate lending. Tey enable banks to hedge against rising rates and give customers what they want. For instance, while banks may prefer variable-rate positions, particularly in a low-rate environment, customers tend to demand long-term, fixed-rate loans. With an interest-rate swap, both outcomes are effectively possible.
Now is a good time for bank leaders to reevaluate the use of swaps at their institutions. By modeling different scenarios with swaps on their balance sheets, they can start to understand when it makes sense to use them. If they aren’t using swaps, they should be able to explain why they aren’t and the conditions under which they would.
In a healthy economy, loans outgrow deposits — the question is when and by how much. If banks suddenly find themselves in a situation where money is going out the door, they may need to replace deposits with funds that offer a spread. Many will not be able to exit certain asset positions (and they may not want to).
Of course, wholesale funding also is a great tool for managing interest-rate risk — much more so than retail deposits.
Given that we are in a once-in-a-century funding environment, now is the time for bank leaders to take a harder look at their sources of funds and funding strategies. Tey could find ample opportunities to lock in low rates, refinance higher- cost funding and diversify their funding sources.
NOW IS THE TIME TO PREPARE. Te current environment poses many challenges. However, with COVID-19 vaccinations spreading throughout the population and new case numbers falling by the day, bank leaders should be taking steps to prepare for a potential rebound.
And they should be mindful that, oſten times, the greatest risk to an institution is the risk of doing nothing. Tis axiom holds true particularly during times of economic uncertainty, which can not only cause business disruptions but also have a paralyzing effect on decision- making.
lcaldwell@
promnetwork.com
20
mobankers.com
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